Zappos.com flipped a switch and ditched 25% of its revenue. The resulting growth led Amazon.com to buy the once-struggling company for over $1 billion.

Zappos.com launched in 1999 with a plan like that of many dot-coms birthed in the tech bubble: to be an online shoe company without ever touching a shoe. Customers would order footwear on its website, it would transmit the orders to vendors, and vendors would ship them from their own warehouses.

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“On paper, it was a great idea,” CEO Tony Hsieh says. But in practice, it wasn’t. Four years after its launch, Zappos.com wasn’t profitable, it couldn’t raise funding, and retail shoe sales nationwide were only just recovering from the 2001 recession. To survive, Hsieh realized, the company needed to stop selling sneakers and start selling something more valuable: a customer service experience. It couldn’t do that unless it was in control of shoppers’ orders, which meant it needed to mail the shoes itself.

“As an e-commerce company, we should have considered warehousing to be our core competency from the beginning,” Hsieh wrote in his book, Delivering Happiness. “Outsourcing that to a third party and trusting that they would care about our customers as much as we would was one of our biggest mistakes. If we hadn’t reacted quickly, it would have eventually destroyed Zappos.”

By 2003, 75% of sales came from its warehouse’s stock. Overnight, Zappos stopped selling any shoe that it didn’t ship itself, ditching a quarter of its business. “We flipped a switch and we lost 25% of revenue,” Hsieh says. “It was really one of those bet-the-company moves.”

And he bet it on his frontline agents, investing money that normally would have been spent on advertising. He hired people who shared Zappos.com values, telling them to do whatever “they think is the right thing” for their patrons. Hseih, who has a tattoo of the company’s logo on his head, encouraged a corporate culture that accepted that “everybody’s a little bit weird, somehow.” (Employees wear hoodies or Dave & Buster’s T-shirts to work, and decorate their workstations with streamers or pirate paraphernalia.)

It worked. Customers were happier. Workers were happier. And gross merchandise sales grew to $2 billion, driven by repeat customers and word of mouth. “Our customers do the marketing for us,” Hsieh says. And, in November 2009, Amazon.com bought the company in an agreement worth $1.2 billion at closing.

Hsieh never used the term “pivot” to describe his change in strategy. Instead, “It was about what [we wanted] Zappos to stand for and mean in the long-term.”

About the author

Simone Baribeau is a freelance writer based in Miami, Florida. She has written for Bloomberg News, the Financial Times and the business sections of the Washington Post and the Christian Science Monitor.